Ed Miliband says unilateral action by the GMB to cut its annual funding by 88% has inadvertently made the case for reform of the historic link between the party and the unions Photograph: Murdo Macleod

Ed Miliband will say to the boss of Britain's third largest union that he is determined to press ahead with reforming the Labour party's funding in the aftermath of his organisation's decision to slash its affiliation funds by more than £1m.

The Labour leader is prepared to tell Paul Kenny that the unilateral action by the GMB to cut its annual funding by 88% has inadvertently made the case for reform of the historic link between the party and the unions.

The 65-strong GMB executive announced on Wednesday that it would cut the number of its members affiliated to Labour from 420,000 to 50,000 next January, slashing the amount of affiliation funds that would be paid to the party in 2014 from £1.2m to £150,000.

The move is in protest at Miliband's announcement, in the wake of the row over union involvement in the selection of a Labour candidate in Falkirk, that three million trade union members who pay the political levy would be personally asked if they wished to affiliate with the Labour party. Under current rules, trade union executives decide how many of their political fundpayers are affiliated.

Labour sources pointed out that there was a difference between Miliband's approach – to give union members an individual say over their relationship with the party – and the way in which 65 members of an executive decided the fate of 370,000 trade union members on their behalf.

One Labour source said: "We are determined to try and mend the relationship, not end it. It would seem to us that the GMB has rather made the case for reform rather than undermine it. There is a consultation going on but do not underestimate the determination of Ed Miliband to make this happen."

As the row flared, six days before Miliband is due to address next week's Trades Union Congress, Alan Johnson, the former home secretary who has also served as general secretary of the Union of Communication Workers, offered strong support for the party leader.

He told The World at One on Radio 4: "We can no longer go on living the lie with these millions of people signed up as levy-paying members to the Labour party, and treated as if they were members. I call them the ghosts in the machine. That is bad for the party, it is bad for the trade unions."

But a more conciliatory Frances O'Grady, the TUC general secretary, told the Guardian that she did not believe that the trade union movement had "any appetite" to break the link between the unions and Labour. "I don't have a crystal ball but I don't think that link will get broken," she said. "It seems to me that over history that link has changed, evolved, it is bound too it is not written in stone, but the important thing is that it is there."

The general secretary said most people are more worried about the behaviour of big business than the relatively small individual affiliation fees sent to Labour. "It is obviously a matter for those unions that are affiliated to Labour and it is not for me to give advice," O'Grady said. "The key point I would make is that most people are not worried about the link between democratic organisations of ordinary working people giving a few pence every week to Labour, what they are really worried about is big business and wealthy individuals who frankly have too big a grip on politics today."

Tom Watson, the Labour MP who resigned from the shadow cabinet during the Falkirk selection row, voiced fears that the GMB move could spell the end of the historic link between Labour and the trade unions. Watson wrote on his blog: "If this is the beginning of the end of that historic link, it is a very serious development that threatens a pillar of our democracy that has endured for over one hundred years. Some will scoff but they are fools to do so. That party card stands for something more than confirmation that an annual direct debit has been processed. Over the next year we have been asked to consider a change to the constitution of the Labour party, though no detailed proposals have been revealed. I'm not opposed to reform but I will fight very hard to retain the fundamental link between the party and Labour movement."

Miliband is not expected to touch on the GMB move when he addresses the annual meeting of the TUC next week because only half of Britain's trade unions are affiliated to the Labour party. The Labour leadership will instead focus on the publication by Lord Collins of Highbury, the former Labour general secretary, of his interim report on Miliband's proposed reforms at the Labour conference in Brighton later this month.

One Labour source said there were grounds for negotiations between the publication of the Collins report and a special conference next spring where the Labour leadership is due to put its final plans to a vote. "This looks like an opening salvo by Paul Kenny. He is a wheeler dealer who likes to negotiate deals," said the source. "Maybe he wants to shut this down. But he has said that his changes will not happen until January – a lot can happen between now and then. Paul Kenny is a very effective negotiator. He had Asda on the run for a year and he made life hell for private equity firms. He didn't do that to bring them down. It did it to get a better deal for his members employed by companies run by the private equity firms."

Other major unions affiliated to Labour declined to comment on GMB's move adding that they were waiting to for initial findings of the Collins review before deciding what changes – if any – to make.

A spokesman for Britain's biggest union Unite – which had been embroiled in the Falkirk row – said the union had no immediate plans to change its relation with the Labour party. He added the union it was waiting to see how the reforms proposed by Miliband developed. "We are awaiting the Collins review and will see the outcome of that. Ultimately any decision is for our members to take."

However, Bob Crow, general secretary of the RMT, which split with the Labour party in 2004, said: "No one should underestimate the seismic knock-on effect from Ed Miliband's post-Falkirk attack on his affiliated unions. This is a pivotal moment and adds fuel to the debate kicked off by RMT about the need for a new party of labour. As the consensus grows that Labour no longer represents the interests of the vast majority of trade union members, the question that throws up is 'who does?' That is a question RMT will be posing in Bournemouth this weekend as we assemble for what now looks like one of the most timely TUC congresses in recent years."